Property Tax Levy Law. Mike Sobul, CFO/Treasurer, Granville EVSD Consultant, Public Finance Resources, Inc. OSBA Capital Conference November 11, 2013

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1 Property Tax Levy Law Mike Sobul, CFO/Treasurer, Granville EVSD Consultant, Public Finance Resources, Inc. OSBA Capital Conference November 11, 2013

2 Constitutional Restrictions * O. Const. Art. XII, Sec. 2 imposes two primary limitations on real property taxation * All real property must be taxed uniformly according to fair market value * i.e., all real property must be treated equally * Taxes can exceed one percent of true value (fair market value) only by popular vote

3 Constitutional Restrictions * Statutory law is even more restrictive * Unvoted taxes cannot exceed 1% of taxable value * See RC * Article XII, Sec 2a of the Constitution allows real property to be classified or categorized for tax reduction factors as either residential/ agricultural or other

4 Property Taxation Overview * There are two classes of real property * Residential & agricultural (Class 1) * Commercial and industrial (Class 2) * There are two types of tangible personal property * General business (which is no longer taxable) * Public utility

5 Property Taxation Overview PERCENTAGE OF SCHOOL PROPERTY TAX COLLECTIONS BY TYPE Tax Year % 24.3% Residential/Agricultural 69.5% Commercial/Industrial Public Utility Tangible

6 Property Taxation Overview * In a simple world, calculating property tax is simple : Property Value Property X Tax Rate = Property Tax Due

7 Property Taxation Overview * In Ohio, real property tax is calculated: ( ) Property Assessment X Value Rate % X (35%) Tax Gross Real Credits Property - (paid by Taxes state) = = ( Tax X Reduction ) Rate Factors Net Real Property Tax Due

8 Property Tax Rates * There are three different tax rates for each levy that is in effect: The voted rate at which the levy was originally enacted, which is the rate that is always applied to tangible property The effective tax rate for Class 1 real property, which is the rate calculated after application of Class 1 reduction factors The effective tax rate for Class 2 real property, which is the rate calculated after application of Class 2 reduction factors

9 Property Tax Rates * There are two different ways tax levies can be implemented: * Unvoted millage (inside millage) is approved by the county budget commission, but cannot exceed 10 mills (a mill is 0.1 percent) for any taxpayer * Voted millage (outside millage) is approved by a popular vote

10 Property Tax Rates * The Ohio Constitution limits property tax rates without a vote to one percent of true value * State law further restricts the unvoted limit to 10 mills of assessed value * the 10- mill limitation * These 10 mills are the inside mills, of which schools generally receive 4 to 6 mills

11 Property Tax Rates * All levies in excess of the 10- mill limitation are outside levies and can only be enacted by popular vote * There are several different allowable purposes for levies (both inside and outside) * For voted levies, the purpose determines whether tax reduction factors apply * Inside millage is not subject to reduction factors

12 Levy Purposes * There are four main purposes for voted school district levies: Current Expense, for the general operations of the school district Emergency, for the general operations of the school district Permanent Improvement, generally for maintenance of physical plant Bond, for site acquisition and building construction

13 Levy Types * These levies can be divided into two groups: * Fixed- rate levies * Current expense * Permanent improvement * Fixed- sum levies * Emergency (school district only) * Bond

14 Levy Purposes * Fixed- rate levies are subject to tax reduction factors for real property taxation * The full rate applies to public utility tangible property * Provides revenue growth if additional property is added to the district * Fixed- sum levies are designed to raise specific dollar amounts from all types of property, and are not subject to reduction factors * Revenue is generally not subject to growth

15 Common Levy Types * Additional levies are new. They result in an increase in tax * Renewal levies continue taxation at the same rate that is already being paid. There is no increase in tax revenue * Replacement levies sound like renewal levies, but provide additional revenue under reduction factor law. The additional revenue comes only from real property

16 Special Levy Types for School Districts * Incremental rate levies (ORC ) * Current expense purpose only * Works like a series of fixed- rate levies * Incremental amount levies (ORC ) * Current expense purpose only * Works like a series of fixed- sum levies * Dual purpose levies * Many different combinations are permissible

17 Special Levy Types for School Districts * Substitute Levies (ORC ) * Can only replace existing emergency levies * Revenues allowed to grow to capture new construction * Conversion Levies (ORC ) * Works very similarly to an emergency levy * Allows districts to get to the 20- mill floor * 2014 is the last year these are allowed on the ballot * Income Tax Levies (ORC 5748) * One option is a tax on all income * Second option is a tax on earned income only

18 Income Taxes * 184 districts currently have an income tax * The tax is on residents only * The current trend is for taxes on earned income only * For more information see: * SDIT_q_and_a_updated_2010.pdf

19 Tax Reduction Factors * Enacted by H.B. 920 in 1976 * Tax reduction factors are designed to: * Prevent a taxing jurisdiction from realizing additional revenue from increases in the market value of real property * Only applies to real property that existed in the district in both the current and previous year * Does not apply to new construction or improvements to real property

20 Property Tax Limitations Brief History * Ohio has a long history of property tax limitations * Reduction factors began in 1976 * For about 50 years prior to that a millage rollback system existed

21 Property Tax Limitations Brief History * Under the millage rollback system, only one millage rate for all property * The single rate was rolled back to prevent increases in tax revenues

22 Property Tax Limitations Brief History * The millage rollback system was replaced by reduction factors because the old system was determined to benefit tangible property relative to real property because of high inflation in the early 1970s

23 Common Misconceptions of Reduction Factors * Tax reduction factors are not designed to: * Ensure every taxpayer within a jurisdiction pays the same taxes on a levy as in the year preceding reappraisal or triennial update * Prevent school districts from receiving additional revenue from new construction

24 Tax Reduction Factors ILLUSTRATION Taxpayer 1 Taxpayer 2 Jurisdiction Taxable Value Before Reappraisal $40,000 $40,000 $50,000,000 Taxes Before Reappraisal (50 mill rate) $2,000 $2,000 $2,500,000 Taxable Value After Reappraisal $46,000 $42,000 $55,000,000 Taxes After Reappraisal (45.45 mill rate) $2,091 $1,909 $2,500,000 Valuation in district increases 10 percent, but Taxpayer 1 s value increases 15% and Taxpayer 2 s value increases 5% Assumes all 50 mills of tax are outside levies subject to reduction

25 Tax Reduction Factors ILLUSTRATION 2 DECREASE IN VALUATION Taxpayer 1 Taxpayer 2 Jurisdiction Taxable Value Before Reappraisal $40,000 $40,000 $50,000,000 Taxes Before Reappraisal (50 mill rate) $2,000 $2,000 $2,500,000 Taxable Value After Reappraisal $35,200 $38,400 $46,000,000 Taxes After Reappraisal (54.4 mill rate) $1,915 $2,089 $2,500,000 Valuation in district decreases 8 percent, but Taxpayer 1 s value decreases 12% and Taxpayer 2 s value decreases 4% Assumes all 50 mills of tax are outside levies subject to reduction

26 Tax Reduction Factors * Restrictions to tax reduction factors * The legislature may place floors on effective rates for any type of jurisdiction * Floors must be placed uniformly within the jurisdiction type * Two floors are currently in place * The 20- mill floor for school districts * The 2- mill floor for joint vocational school districts

27 Tax Reduction Factor Floors * Only current expense millage (inside or outside) counts toward the 20- mill floor * The calculation excludes: * Bonds, permanent improvement levies, and emergency levies * Although emergency levies are a form of current expense levy, they are excluded from the 20- mill calculation by statute. * The 20- mill floor essentially prevents further reduction of tax rates once it is reached

28 Levy Purposes and Reduction Factors COMMONLY USED SCHOOL LEVIES AND THEIR TREATMENT UNDER TAX REDUCTION FACTORS Type of Levy Subject to Reduction Factors Factored in 20-Mill Floor Calculation Inside Millage (Current Expense) No Yes Inside Millage (Bond) No No Inside Millage (Permanent Improvement) No No Outside Millage (Current Expense) Yes Yes Outside Millage (Bond) No No Outside Millage (Permanent Improvement) Yes No Outside Millage (Emergency) No No

29 Tax Reduction Factor Floors EFFECT OF REDUCTION FACTORS ON CURRENT OPERATING TAXES District One District Two Base Year Taxable Value $50,000,000 $50,000,000 Inside Millage (millage exempt from tax reduction factors) Base Year Outside Millage (millage subject to reduction factors) Base Year Total Millage (combined inside and outside) Base Year Taxes/Outside Millage (17 mills x $50,000,000) 1 $850,000 $850,000 Base Year Taxes/Inside Millage (inside rate x $50,000,000) 1 $200,000 $300,000 Appraisal Year (A.Y.) Taxable Value $55,000,000 $55,000,000 A. Y. Initial Outside Millage ($850,000 / $55,000,000)* A. Y. Inside Millage (exempt from reduction factors) A. Y. Revised Outside Millage** A. Y. Total Effective Millage (inside + outside revised millage) A. Y. Taxes/Outside Millage (Revised Outside Millage x $55,000,000) $880,000 $850,000 A. Y. Taxes/Inside Millage (inside rate x $55,000,000) $220,000 $330,000 (1) All millages are for current expenses. *Initially, no new taxes may be generated due to reappraisal. **District One s outside millage is increased from to 16 mills to prevent the total millage from falling below 20 mills. District One is allowed to collect more money on outside millage than District Two, which is unaffected by the 20-mill floor.

30 Tax Reduction Factor Floors EFFECT OF REDUCTION FACTORS ON CURRENT OPERATING TAXES WHEN VALUES DECLINE District One District Two Base Year Taxable Value $50,000,000 $50,000,000 Inside Millage (millage exempt from tax reduction factors) Base Year Outside Millage (millage subject to reduction factors) Base Year Total Millage (combined inside and outside) Base Year Taxes/Outside Millage (16 mills x $50,000,000) 1 $800,000 $800,000 Base Year Taxes/Inside Millage (inside rate x $50,000,000) 1 $200,000 $300,000 Appraisal Year (A.Y.) Taxable Value $45,000,000 $45,000,000 A. Y. Initial Outside Millage ($800,000 / $45,000,000) A. Y. Inside Millage (exempt from reduction factors) A. Y. Revised Outside Millage A. Y. Total Effective Millage (inside + outside revised millage) A. Y. Taxes/Outside Millage (Revised Outside Millage x $45,000,000) $800,000 $800,000 A. Y. Taxes/Inside Millage (inside rate x $45,000,000) $180,000 $270,000 (1) All millages are for current expenses.

31 Tax Reduction Factor Floors * Once a district reaches the 20- mill floor, it receives full growth on those 20 mills * i.e., H.B. 920 s tax reduction factors do not apply * Also, there is no banking of reduction factors that would have applied below 20 had there been no floor. A district at the 20- mill floor that passes a new levy gets the full revenue impact from that new levy * A district at the floor that has values decline will come off the 20- mill floor

32 Tax Reduction Factor Floors * For tax year 2012, 209 districts were at the 20- mill floor for at least one class of real property * In tax year 2008, 400 districts were at the 20- mill floor for at least one class of real property * Many are just off of the floor because of valuation drops associated with the real estate market

33 Tax Reduction Factor Floors * Getting to the floor creates growth in real property taxes from reappraisal on all 20 mills * To get additional money, districts can use emergency levies and/or income taxes because these do not count toward the floor (about 2/3 of districts at the floor have done this)